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On Wednesday, Baltimore-based Legg Mason Inc. (LM - Analyst Report) reported a slight rise in its assets under management (AUM) in November 2012, compared with the prior month. However, the company reported a marginal decline in the prior month, followed by a rise in the last quarter.

Preliminary quarter-end AUM came in at $648.3 billion, up 0.4% compared with the prior month. Equity AUM and Fixed Income AUM were down in the month under review, though liquidity AUM advanced.

Legg Mason’s equity AUM as of November-end inched down 1.0% from the prior month to $145.1 billion while fixed income AUM declined 0.7% compared with the prior month to $369.3 billion.

The fall in equity and fixed income AUM resulted in long-term AUM of $514.4 billion, reflecting a 0.8% decline against the prior month. However, liquid assets, which are convertible into cash, surged 5.2% to $133.9 billion.

Quarterly Performance

As of Sep 30, 2012, Legg Mason’s AUM was $650.7 billion, up 3% sequentially from $631.8 billion, driven by market appreciation of $20.7 billion and net client inflows of $0.2 billion, partially offset by dispositions of $2.0 billion.  Fixed income represented 57% of consolidated AUM as of Sep 30, 2012, liquidity represented 20% and equity comprised 23%.

During the quarter, liquidity inflows were about $9.7 billion. However, equity and fixed income outflows were $5.7 billion and $3.8 billion, respectively. Besides, average AUM was $639.4 billion compared with $635.5 billion in the prior quarter.

Peer Performance

One of Legg Mason’s peers, Invesco Ltd. (IVZ - Analyst Report), announced a marginal 1.0% rise in its preliminary month-end AUM for the month of November 2012. The AUM for the month came in at $683.8 billion compared with $677.0 billion at the end of October. Favorable market returns and total net inflows were partly offset by negative foreign exchange.

Another peer - Franklin Resources Inc. (BEN - Analyst Report) - declared preliminary AUM of $768.8 billion by its subsidiaries for the month of November 2012. The company’s results witnessed a rise of 2.0% from $753.9 billion as of Oct 31, 2012. Moreover, it increased 13.8% from $675.8 billion as of Nov 30, 2011.

Our Viewpoint

We believe that Legg Mason has the potential to outperform its peers in the long run, given its diversified product mix and leverage to the changing market demography. However, in the near term, assets outflows will remain a significant headwind. Yet, owing to the restructuring initiatives and the cost-cutting measures, we expect operating efficiencies to improve and dividend payments to continue to inspire investors’ confidence in the stock.

Legg Mason currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. We believe the acceleration in AUM amid volatile markets might lead to positive estimate revisions. This, in turn, could trigger an improvement in the Zacks Rank.

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